ASIA CONFERENCE ON BUSINESS AND ECONOMIC STUDIES

ASIA CONFERENCE ON BUSINESS AND ECONOMIC STUDIES 285 A Study on Bank Lending Behavior Do Business Cycle and Government Ownership Affect? Le Van Lam Tran Phuong Thao Than Thi Thu Thuy University of Eco[.]

A Study on Bank Lending Behavior:

Do Business Cycle and Government Ownership Affect?

Le Van Lam Tran Phuong Thao Than Thi Thu Thuy

University of Economics Ho Chi Minh City, Vietnam

Abstract

This study investigates the bank lending behavior in Vietnam by examining the role of business cycle as well as government ownership over the period 2010-2016 The empirical results support for the procyclical

behavior of banking lending behaviour suggesting that banks expand theirs loan in booming period of

economy In addition, state-owned banks are less sensitivity to the change of business cycle than private banks

in a booming period This study sheds further light on the essential role of government-owned bank over the

business cycle in the process of financial resource allocation for economic developments in an emerging

country context

Keywords: business cycle, bank lending behavior, government ownership, Vietnam

1 Introduction

Bank lending is an engine of growth in many countries An expansion of bank lending may enhance the growth of an economy while a decrease of bank lending may hamper the economic growth The literature on

bank lending is substantial in prior studies including Lin and Zhang (2009); Williams (2012); Mendes and

Rebelo (2003) who mainly focus on determinants of the behavior of bank lending

Among aformentioned studies on bank lending, an interest on bank ownership is taken into account by many researchers including Lin and Zhang (2009), Micco and Panizza (2006), Behr et al (2013), Krainer (2014),

Thakor (1996) and De Haas and Van Lelyveld (2010) who demonstrate great impact of bank onwership on

bank lending behavior, especially in emerging contexts as their loans are mainly for serving the growth of the

economy under the government direction Micco et al (2007) find that the lending of state-owned banks is less

responsive to macroeconomic shocks than the lending of private banks This suggests that state-owned banks

could play a useful role in the transmission of monetary policy Behr et al (2013) observed that in the Germany,

bank lending behavior, especially its scale, scope and timing, is largely driven by bank business models which

differ between privately owned and state-owned banks, suggesting that the ownership of banks may have an

impact on the lending behavior of banks Sapienza (2004) observe that state-owned banks charge lower interest

rates than privately owned banks do They also observe that the lending behavior of state-owned banks is

affected by the electoral results of the party affiliated with the bank

Business cycle is known as a key driver affecting bank performance including bank lending since they can influence the profitability and stability of banks Some common business cycle proxies are taken into account

in prior studies such as gross domestic production and interest rate (Lin and Zhang, 2009, Behr et al.,

2013)_ENREF_3 Aydemir and Guloglu (2017) conduct an investigation for the period 2002-2013 in Turkey

and point out that business cycle affects not only bank spreads but also the relation between credit risk,

liquidity risk and bank spreads Bernanke and Gertler (1989) and Bernanke et al (1999) provide evidence that

(2006) examine impacts of GDP growth on bank credit growth and find evidence of less procyclical for state

banks over the period 1995 – 2002

In the Vietnamese banking context, a wide range of studies were taken; however, almost studies consider bank performance, bank competition or bank efficiency (Malesky and Taussig, 2009, O'Connor, 2000, Nguyen

et al., 2016b, Minh et al., 2013, Andrievskaya and Semenova, 2016) Additionally, despite several studies

examining the effects of ownership and business cycle on bank lending in developed countries, their findings

have no consensus Moreover, none of them have examined these effects in the Vietnamese banking industry

This gives strong motivation to test whether state ownership of banks and business cycle are correlated with

bank-lending behavior in the Vietnamese banking system

In light of the research motivation and literature gap, this study examines the effect of government ownership and business cycle on the bank lending behavior of banks in Vietnam by answering two research

questions (1) How does bank lending respond to the changes in business cycle and (2) Is there a difference in

lending behavior across bank ownership types?

The findings of this study provide new and comprehensive evidence on bank lending in Vietnamese banks

It suggests that government – owned banks play an important role in stabilizing the credit market in Vietnam

over the business cycle In addition, government-owned banks are less sensitivity to the change of business

cycle than private banks in a booming period It confirms that alternative policy tools via government – owned

bank is appropriate for the management strategy of emerging countries like Vietnam as they play a dominant

role in the process of financial resource allocation for economic developments

The paper is structured in 5 sections Section 2 reviews empirical studies on bank lending behavior and its determinants including ownership and business cycle factors Section 3 presents the research models

investigating the impact of government ownership and business cycle on the lending behavior in Vietnamese

banks and justifies the technique used to estimate these model Section 4 presents empirical findings on the

impact of bank government ownership and business cycle on the lending behavior of banks in Vietnam

Finally, section 5 draws a conclusion of the study and highlights the policy implications

2 Literature review

There is a voluminous strand of literature regarding the relation between government ownership, bank performance and economic growth The development view of Gerschenkron (1962) holds that the

government’s participation in banking and financial sector is necessary to economic growth since it increases

the likelihood of allocating funds to long-term strategic projects that mainly contribute to the economic

development On the contrary, the political view by Shleifer and Vishny (1994) argues that the state ownership

in banks gives the government opportunity to allocate funds for the shake of political interest such as bribes

or getting the votes in the election periods, therefore lowering economic efficiency The latter view is

supported by a number of empirical evidences employing cross country data Barth et al (2001) and La Porta

et al (2002) document that higher level of state ownership of banks is associated to greater bank inefficiency

and lower financial development The presence of state ownership is also found to have a negative impact on

financial stability and economic growth (La Porta et al., 2002) The results from a number of studies in

individual countries are consistent with this view For instance, the cost efficiency of state-owned banks is

lower than that of private banks in Argentina (Berger et al., 2005) or less efficient, less profitable and have a

lower quality of assets in China (Lin and Zhang, 2009)

However, there is sparse literature about the impact of government ownership on banks’ lending behavior over the business cycle Moreover, the results from empirical evidences are inconsistent Employing the data

on Western European banks for the period 2000 to 2009, Iannotta et al (2011) shows the indifference of lending

behavior across the business cycle between state-owned banks and private banks Cull and Peria (2013) finds

that the impact of government ownership in banks on their credit growths depends on geographic regions

Examining the lending behavior of Eastern European and Latin American banks during the crisis 2008-2009,

the study concludes that credit growth of state-owned banks is counter cyclical in the latter group but not in

the former one

Brei and Schclarek (2013) examines an international dataset of 50 countries for the period of 1994-2009 and concludes that state-owned banks increase their credit in the time of crisis, suggesting that the government

actively interfere the flows of funds through its ownership in banks The government’s presence in banks is

found to maintain better the credit growth during the recent global financial crisis in some economies that

were belong to the former Soviet Union (De Haas et al., 2012) Micco and Panizza (2006) argues that

state-owned banks play a crucial role in stabilizing credit in the economy, explaining for their less pro-cyclical

lending behavior compared to their private counterparts Holding the same view with Micco and Panizza

(2006), Bertay et al (2015) employs an international dataset from 1999 to 2010 and finds that the amount of

loans provided by state-owned banks is less pro-cyclical than that of private banks

The Vietnamese context shows the influence of government in the banking sector as well as the role of state-owned banks in the economic outcomes As a transitional economy, Vietnam experienced an economic

reform in 1986 that allowed the privatization of banking sector Although this reform introduced the presence

of private banks together with state-owned banks in the economy, the latter group still shows its dominance

to the former group in terms of size, profitability and efficiency (Nguyen et al., 2016a) In addition, the

government is likely to implement its objective in stabilizing macroeconomic environment through its

ownership in banking sector State-owned banks, therefore, are expected to play a useful role in stabilizing

credit over the business cycle Moreover, due to a longer establishment and a better bank governance than

their counterpart, state-owned banks in Vietnam are possibly considered to be safer than private banks,

leading to the fact that they can enjoy a stable deposit base, enabling them to easily stabilize their lending over

the cycle

Based on these arguments, we postulate two hypotheses on banking lending behavior of the Vietnamese banking sector as follows:

Hypothesis 1 (H1): The lending behavior of Vietnamese banking sector is procyclical Hypothesis 2 (H2): The bank lending of state-owned banks is less pro-cyclical than that of private banks in

the Vietnamese banking sector

3 Research methodology

Research model

To examine the lending behavior with regard to the ownership and business cycle, the study employs theoretical model given by Kashyap and Stein (1995) The model was later modified by several researchers

such as Gambacorta (2005), Mistrulli (2004) and Bertay et al (2012) Specifically, two models are given in

response to the research questions as follows:

Model 1: Bank lending behavior responds to the business cycle 𝐵𝑎𝑛𝑘 𝑙𝑒𝑛𝑑𝑖𝑛𝑔𝑖,𝑡 = 𝛼𝐵𝑎𝑛𝑘 𝑙𝑒𝑛𝑑𝑖𝑛𝑔𝑖,𝑡−1+ 𝛽 𝐺𝐷𝑃 𝑔𝑟𝑜𝑤𝑡ℎ 𝑟𝑎𝑡𝑒 𝑖,𝑡+ 𝛿𝐵𝑎𝑛𝑘 𝑠𝑝𝑒𝑐𝑖𝑓𝑖𝑐 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒𝑠𝑖,𝑡+ 𝜀𝑖,𝑡 (1) Model 2: The role of government ownership on Bank lending behavior and business cycle

𝐵𝑎𝑛𝑘 𝑙𝑒𝑛𝑑𝑖𝑛𝑔𝑖,𝑡= 𝛼𝐵𝑎𝑛𝑘 𝑙𝑒𝑛𝑑𝑖𝑛𝑔𝑖,𝑡−1+ 𝛽 𝐺𝐷𝑃𝑔𝑟𝑜𝑤𝑡ℎ 𝑟𝑎𝑡𝑒𝑖,𝑡+ 𝜕𝐺𝑜𝑣𝑒𝑟𝑛𝑚𝑒𝑛𝑡 𝑜𝑤𝑛𝑒𝑟𝑠ℎ𝑖𝑝 ∗ 𝐺𝐷𝑃 𝑔𝑟𝑜𝑤𝑡ℎ 𝑟𝑎𝑡𝑒𝑖,𝑡+ 𝛿𝐵𝑎𝑛𝑘 𝑠𝑝𝑒𝑐𝑖𝑓𝑖𝑐 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒𝑠𝑖,𝑡+ 𝜀𝑖,𝑡 (2)

Where Bank lending is measured by the log of loan volume of bank i in year t;

Business cycle is measured by the GDP growth rate in year t;

Government ownership is a dummy variable which takes 1 if the government ownership in banks is over 50% and 0 if otherwise;

Bank specific variables are controlling ones including capitalization, liquidity and bank size Due to the potential endogeneity of GDP growth rate to the lending volume and the presence of lagged independent variables in the models, we employ the one-step system GMM estimation Furthermore, the

GMM estimator is also designed to address the fixed effects problem that is caused by the unobserved

bank-specific factors in the error terms All independent variables except the GDP growth rates, the government

ownership variables and the interaction terms between them are treated as predetermined variables that

allows the correlation between the current values of them with the past and present error terms but not with

the future ones

To examine the appropriateness of the GMM estimators, we respectively conduct the Hansen test for the overidentifying restrictions and the Arellano Bond test for autocorrelation of error terms The null hypothesis

of the first test is that the overidentifying restriction is valid, meaning that the instruments are valid when the

null hypothesis is not rejected The null hypothesis of the second test is that there is no autocorrelation in the

differences of residuals A second order test in first differences tests for autocorrelation in levels Therefore, it

is expected that the null hypothesis of the second order test is not rejected

Data sample

The study utilizes an unbalanced panel, consisting of 30 main local banks in Vietnam for the period of

2010-2016 To capture the ownership of Vietnamese commercial banks, the study conducts two groups of

commercial banks namely state-owned banks and private-owned banks The micro-level data of commercial

banks is collected from Bankscope provided by Bureau Van Dijk while the data of GDP growth rates is

collected from IMF database

Table 1: Variable measurements and data sources

Government ownership Dummy variable for government ownership (1 for >=50% and 0 for otherwise) Bankscope, annual report GDP growth rate annual growth rate of real gdp International Financial Statistics - IMF database

Deposit on liablity deposit/liablility Bankscope, financial report

Liquidity liquid assets/ total assets Bankscope, financial report

Table 1 summarizes the measures and data sources of variables We employ the log of loans as a proxy of lending behavior of banks The main explanatory variables are the government ownership in banks (a dummy

variable that takes 1 if the percentage of government ownership is higher than 50% and 0 for otherwise) and

business cycle that is represented by the annual growth rates of GDP To examine the effects of government

ownership on the lending behavior over the business cycle, we employ the interaction term of government

ownership dummy and GDP growth rates As in our first hypothesis, we expect that business cycle is

positively related with lending behavior of banks while as in our second hypothesis, we expect there is a

negative relation between the interaction term and the dependent variable We also include several bank

specific factors as controlling variables in the models The first one is bank size that is measured by the log of

total assets We construct the ratio of equity to total assets as a proxy of bank soundness Another controlling

variable is liquidity that is measured by the percentage of liquid assets in total assets This variable indicates

the lending ability and inefficiency of banks Finally, the ratio of deposit over liability shows the stability of

banks’ funding The statistics summary of all variables are presented in table 2

Table 2: Descriptive statistics

4 Empirical findings

Table 3 reports the empirical results of this study Our first concern is the relation between business cycle and the lending behavior that is informed by the coefficient on business cycle in the first model The first

column of table 3 shows that the coefficient on GDP growth rate enters positively that is significant at 1% level,

meaning that banks expand their loans volume in booming periods of economy In other words, banks show

their procyclical behavior in lending This result confirms the role of financial institutions in providing funds

that is essential to the economic development

Our second concern is whether there is a difference between the lending behavior of state-owned banks and private banks over the business cycle It could be seen from the second column of table 3 that the coefficient

on GDP growth rates still holds a positive sign and that is significant at 10% level when we include the

interaction term between government ownership dummy and GDP growth rates in the model In addition,

the interaction term is negatively related to the dependent variable and significant at 1% level These reveal

that the effects of the lending behavior of banks over the business cycle vary depending on their types of

ownership Compared to private banks, state-owned banks show that they are less procyclical in lending

behavior, meaning that the loans volume of state-owned banks is less than that of private banks in booming

periods but in recession, they lend more than their private counterparts This finding is consistent with our

second hypothesis and the results of Micco and Panizza (2006) and Bertay et al (2015), showing the role of

government in stabilizing funds in the economy via their ownership in banks The potential explanation for

that result is that state-owned banks have chance to enjoy a more stable deposit base than private banks since

they are dominant in size, better in governance from depositors’ views and are likely to receive the support

from government This results in a less sensitivity to the change of business cycle in the cost of funding of

state-owned banks compared to their private counterparts In addition, all regressions pass the second oder

test of autocorrelation and Hansen overidentifying tests, showing the validity of instruments

Table 3: Empirical results

Lagged log of loans

0.256**

(0.013)

0.462***

(0.000) GDP growth rate

5.141***

(0.001)

3.029 * (0.095) GDP growth rate * government ownership

-14.149 ***

(0.000)

Deposit on liability

0.629***

(0.000)

0.163 (0.251) Equity on asset

2.560***

(0.000)

0.547 (0.313) Liquidity

-0.577***

(0.000)

-0.902***

(0.000) The dependent variable is lending behavior measured by the log of loans GDP growth rate is the rate of annual real GDP Government ownership is a dummy variable that takes 1 if the percentage of government

ownership in banks is higher than 50% and 0 for otherwise Bank size is the log of assets Deposit on liability

is the ratio of deposit over liability Equity on asset is the ratio of equity over total assets Liquidity is the ratio

of liquid assets over total assets All regressions are estimated by one-step system GMM estimator with

Winmeijer correction The p-values are given in parentheses *, ** and *** respectively stand for significance at

10%, 5% and 1%

5 Conclusions

The bank lending is essential for economic development with regards to its allocation process of financial resources to the whole economy This study analyses the bank lending behavior in the Vietnamese context by

taking into account the effects of business cycle and governement ownership over the period 2010 - 2016

The study confirm procyclical effect of business cycle on the lending behavior state highlight an important role of bank lending of financial institutions in an emerging market In addition, this study also provide a

comprehensive picture of the bank behavior of banks in Vietnam by taking into account the interaction of bank

ownership and business cycle Especially, the findings on the role bank ownership and interest rate will be

useful for the policy makers and bank managers who are interested in the lending behavior of Vietnamese

banks

Reference